Masahiro Morimoto, entrepreneur, CEO and Chairman of the Board, UBIC Inc. (today: Fronteo) A discussion with Dr. Gerhard Fasol

Masahiro Morimoto, entrepreneur, CEO and Chairman of the Board, UBIC Inc. (today: Fronteo)

UBIC Inc (today: Fronteo): founded to curb huge losses of Japanese corporations due to litigation abroad

A discussion between UBIC (today: Fronteo) CEO Masahiro Morimoto and Dr. Gerhard Fasol

From Japanese/Chinese/Korean (CJK) e-discovery, to data forensics, virtual data scientist and predictive coding

Masahiro Morimoto founded UBIC Inc. on August 8, 2003 to stem the huge losses he saw Japanese corporations incurring due to litigation abroad. English-only software cannot be used for e-discovery of documents in Japanese, Chinese or Korean, and UBIC Inc initially focused on e-Discovery for these double-byte languages. Today, UBIC has grown beyond CJK e-discovery, into applying artificial intelligence tools to predict human behavior from emails and social media, forensics and other fields. Cloud based services are increasing rapidly. Recently, UBIC acquired the US e-discovery company TechLaw Solutions, expanding US business.

UBIC was founded on August 8, 2003
Traded on:
Tokyo Stock Exchange (Code 2158), IPO on November 6, 2007
NASDAQ (Symbol UBIC), IPO on May 16, 2013

UBIC Inc. Financial Data for the Financial Year 2014

(ended March 31, 2015, $1=119.96yen)
Revenues: YEN 6274 million (US $52.3 million)
Operating income: YEN 266 million (US$ 2.2 million)
Net income: YEN 260 million (US$ 2.1 million)

Market capitalization: YEN 33.25 billion ($276 million) ($1=120.17)

Note: on July 1, 2016 the company name was changed from UBIC to FRONTEO.

Discussion between Mr Masahiro Morimoto, CEO and Chairman of the Board, UBIC Inc. (today: Fronteo) and Dr. Gerhard Fasol

  1. Question (Dr. Gerhard Fasol): You announced your most recent financial results on May 13, 2015. Could you kindly give us some of the highlights and some comments?

    Answer (Masahiro Morimoto): For UBIC, the fiscal year ended on March 31, 2015, was memorable for three main reasons:

    1. First, we successfully acquired TechLaw Solutions, a well-established US e-discovery company.
    2. Second, we launched Lit i View EMAIL AUDITOR, a product powered by our proprietary AI program. 
    3. And third, we have promoted several innovative projects with business partners.

    It was not by luck alone that UBIC achieved record high revenue, but as a result of great effort. We achieved both organic and inorganic growth. Our company is entering a new era now.

  2. Question (Dr. Gerhard Fasol): The core of your business is e-discovery with special focus on Asian languages. Can you tell us more about the current state of the e-discovery market, your competitive advantage, and how you can assist your clients?

    Answer (Masahiro Morimoto): Our strength lies in operations that enable us to integrate and manage data within Japan. This is of particular value to the increasing number of Asian companies that do not want their highly confidential data to leave the country. At the same time, we provide an end-to-end, full e-discovery service. Our high level technology has enabled us to develop our own e-discovery reviewing tool, Lit i View.
    Further, our document review services in Asian languages including Japanese that use Predictive Coding, our proprietary AI technology developed by the in-house team, can cut costs while improving the quality of reviews, which can account for up to 70% of discovery costs.
    Lastly, our consultants and project managers can help in bridging any gap there might be between Asian companies and US attorneys, so that complex matters and projects may proceed smoothly for both sides.

  3. Question (Dr. Gerhard Fasol): I understand that most of your work is ultra-confidential, since your work is in the field of data security. However, could you tell us about one or two successes so we can get an idea of how UBIC is able to help clients, and the reason they like working with you.

    Answer (Masahiro Morimoto): One of our customers, which regularly faces cases filed by non-practicing entities (NPEs) in the US, was able to reduce their e-discovery costs by up to 40% by utilizing our services based on our proprietary AI technology. We have heard that achievement garnered a special company award.
    (Note added by Gerhard Fasol: NPE’s are often nicknamed “patent trolls”).

  4. Question (Dr. Gerhard Fasol): I understand that your core product is Lit i View. Can you explain the main characteristics of this electronic data analysis platform, and tell us why it is so important for your customers?

    Answer (Masahiro Morimoto): Currently in Lit i View, we have three types of products.

    1. First, Lit i View E-DISCOVERY, which is an e-discovery support product;
    2. second Lit i View XAMINER, a digital forensics tool; and
    3. third the Lit i View EMAIL AUDITOR, our email auditing tool.

    The feature that these three products have in common and which is unique is that they are equipped with Virtual Data Scientist (VDS), UBIC’s AI software, which enables them to analyze big data.
    Furthermore, Lit i View fully supports data in English, Chinese, Japanese, and Korean, and accurately displays multi-byte characters. In contrast, conventional e-discovery tools developed in English-speaking countries cannot accurately process legal documents written in Asian languages or multi-byte characters, without experiencing problems such as garbling.
    Asian companies, which thus are at a disadvantage in terms of the e-discovery process, have found that Lit i View provides an effective solution to their problems. We are receiving very positive reviews from clients in Asian countries, who tell us that they truly need to use Lit i View for documents in Asian languages.
    For further information, see http://www.ubicliv.com/en

  5. Question (Dr. Gerhard Fasol): Virtual Data Scientist (VDS) is important part of your business model, could you explain us about Virtual Data Scientist?

    Answer (Masahiro Morimoto): At UBIC, we do not consider big data to be merely an accumulation of data, but a collection of people’s thoughts and behavior outcomes. We define behavioral informatics as an analytical interpretation of behavior, and the synthesis of information science (including statistics, mathematics, data mining, and pattern recognition) and behavioral science (including psychology, criminology, and sociology).
    Conventional approaches to big data merely analyze past incidents, from which they extract some facts. But, in behavioral informatics, we are able to predict the future, and we do so by basing our analytics on human cognition and by generating patterns of human and social behavior.
    The highly accurate Virtual Data Scientist software applies a behavioral informatics approach to analyzing big data, thereby making it possible for one to find whatever information is being sought.

  6. Question (Dr. Gerhard Fasol): Predictive Coding is another concept for the basis of your business. Could you explain us Predictive Coding?

    Answer (Masahiro Morimoto): Predictive coding is based on the concept of text mining and AI technology. When e-discovery uses predictive coding, our VDS software analyzes and emulates the e-discovery review sample produced by experienced attorneys, before carrying out the rest of e-discovery review processes. Our AI software not only applies e-discovery to the review of documents at a speed more than 4,000 times faster than that achievable by humans, but also avoids the wide discrepancy in review results that often result from human error. Furthermore, our AI software has proved to be more than 90% accurate in extracting information for e-discovery reviews. Although in litigation, e-discovery is the most expensive process, costs can be cut drastically with our AI. If people use our predictive coding in addition to conventional keyword searches, relevant legal documents will no longer be omitted as often happens when only keyword searches are conducted and keyword settings are misconfigured.

  7. Question (Dr. Gerhard Fasol): Your cloud hosting services appear to be the most rapidly growing area of business, accounting for more than half your revenue. Can you explain what this means for you? Will all your services simply move to the Cloud, or are your Cloud services a new class of products? What benefits do your customers derive from using your Legal Cloud?

    Answer (Masahiro Morimoto): Before answering your question, I would like to explain about our business and work flow of e-discovery. E-discovery has several steps such as identification, preservation, collection, processing, analysis, hosting, document review, and production. We charge for each of the steps. Hosting service is one of the steps of e-discovery, and its purpose is to store the data which has been loaded to the hosting server after collection, processing, analysis, and document review. Unlike the e-discovery process which only takes between one to twelve months to complete, hosting service usually lasts more than five years. One reason that the data which has been processed and reviewed by attorneys must be kept for a long time is that there is high possibility of reusing the data in case of multiple lawsuits and other issues for one particular case, for instance. Furthermore, these data are too valuable and expensive to discard since these data can be leveraged across multiple matters. These are the reasons why hosting revenue has been growing. It is a kind of recurrent revenue for us.
    To answer your question regarding whether we plan to move all our products to the Cloud: we will provide cloud solutions to our customers continuously. But, it depends on the customer and the market requirement. Although we must have cloud solutions to meet the market requirement, we provide all types of solutions such as cloud and on-premise products and services.

  8. Question (Dr. Gerhard Fasol): When I discuss the Cloud with customers and friends, automatically almost the first question concerns security. How do you ensure the security of your Cloud services, and do you see this security as a business opportunity for your company?

    Answer (Masahiro Morimoto): In our Intelligence Cloud Service, clients’ data are securely managed. First, only permitted users have access to restricted virtual desktops; second, we have secure communication networks; third, our communications system has a firewall; fourth, we employ VLAN-based logical separation for network segments; and fifth, we have disaster recovery centers for redundancy operations.
    Currently, our priorities do not include offering Cloud-related security business solutions, since our main business is not only offering Cloud services.

  9. Question (Dr. Gerhard Fasol): I have two questions regarding your TechLaw Solutions acquisition.
    1. First, could you explain the reasons for the acquisition of this electronic discovery and litigation consultancy?
    2. And second, it is a fact that mergers involving US or EU companies on the one hand, and traditional Japanese companies on the other, are often difficult, and sometimes the two companies lead almost independent lives, without really integrating. That being the case, how are you overcoming cultural issues, and could you give some advice to companies undertaking Western-Japanese mergers? What are your key experiences and the conclusions you have drawn that might be applied to ensure successful Western-Japanese company mergers?

    Answer (Masahiro Morimoto): In answer to the first part of your question, we acquired TechLaw Solutions – a US e-discovery consultancy and solutions provider that has been in business for more than 30 years – as part of our strategy to expand our e-discovery market share, with a view to giving ourselves a high-profile presence in the US. Since TechLaw Solutions already has developed a large number of sales channels, its acquisition has given us a unique opportunity to establish the UBIC brand in the US.
    Regarding the second part of the question, all companies have their own culture, so even companies with identical national backgrounds have different cultures. To ensure there are no cultural obstacles when companies merge, it is necessary to recognize and accept that differences exist. UBIC has always respected cultural diversity, and so does not perceive it to be a major challenge.
    Most important of all is the need to share clear, solid, and positive goals, and to clearly visualize the path to those goals. I accompanied members of the UBIC management team on a visit to TechLaw Solutions. We held a number of team meetings, during which I continued to make every effort to convey to them my thoughts, regarding what we expected would be the outcome of the acquisition, the degree to which I believed Techlaw Solutions could help UBIC grow, and the reason I had confidence in our technology.
    At the same time, I held one-on-one meetings with all key employees, and made sure that each of them was enthusiastic about their work and that they held values akin to those upheld by UBIC. Had there been no relationship of trust or the support that comes from sharing common goals, it would have been hard for the companies to merge successfully. But, once we found we had the same goals and could help each other, the cultural differences became non-issues.

  10. Question (Dr. Gerhard Fasol): Your venture company is certainly one of the most successful, having grown rapidly into a global corporation that continues to expand. What are the main factors behind your success? Since improving conditions for the setting up of businesses is one of Prime Minister Shinzo Abe’s growth strategies for Japan, based on your experience, how would you suggest conditions might be improved for entrepreneurs?

    Answer (Masahiro Morimoto): One piece of advice regarding how to improve conditions for entrepreneurs concerns the Japanese education system. Schools should teach children, from a young age, about entrepreneurs and startups.
    Although the climate surrounding fundraising has improved, one critical drawback that Japanese entrepreneurs face is the difficulty in attracting smart, competent people to work for startups in Japan. In Silicon Valley, very competent new university graduates are eager to work for startups or small companies with less than five employees. They do not target Fortune 500 or well-known companies, or even companies such as Facebook or Twitter. In Japan, however, very competent students tend to want to work for big-name companies, rather than startups.
    Part of the problem is that we have not learned about startups and entrepreneurship, which makes it difficult for such businesses to attract young Japanese. For example, I used to be a public servant working for the Japan Maritime Self-Defense Force (JMSDF) prior to working for Applied Materials Japan Inc. But then, having a specific goal that I wished to achieve, I set up my own company. Yet, even at that time, had I had the option of working for a startup, I would not have done so, because the concept of startups was so ill-defined.
    Our children need to be taught that there are any number of work possibilities, ranging from being a florist, an astronaut, an entrepreneur or an employee at a startup. We also should teach our children that working for a large company is not the only option. In Japan, we still believe that large, well-known companies are “safe,” “good,” and, thus, “socially acceptable.” It is interesting to note that, these days, even some of the big companies are setting up-within their organizations-business incubators.
    Japanese media have begun to mention startups and entrepreneurs, while some universities have launched incubator programs to draw students into this area of expertise. This is important, since the younger generations should be made aware that there are any number of ways in which they can utilize their skills.
    There are several reasons for UBIC’s success. One factor is that we are a strong team, committed to a goal. Whereas one person alone can achieve relatively little, a great team with members who empower each other and work together can achieve great things.
    A second reason is that we have a clear corporate mission which is shared by the team. Fortunately, it dovetails well with the current social environment. When we launched our e-discovery business, our mission was to provide secure and cost-effective solutions for Japanese and other Asian companies facing litigation. Based on our expertise in analyzing of huge volumes of litigation-related data in English and several Asian languages, we have been able to develop our behavior informatics analytical tool, which makes it possible to predict how people will think and act based on the human conditions and behavioral norms.
    A third factor behind our success is the strong commitment to working as a team. Our motto – “Enthusiasm, Persistence and Impression” – was chosen to motivate our team to persevere in committing to our shared mission.

  11. Question (Dr. Gerhard Fasol): How did you finance the startup of UBIC? Did you accept venture capital? And what are your thoughts on the use of venture capital in Japan?

    Answer (Masahiro Morimoto): I believe that, in Japan, the overall environment for venture capital has improved, but I did not use venture capital because, in those days, there was little understanding of the benefits of incubating startups over the long term; mostly, their objective was short-term investment for profit.
    As a result, when startups got support from venture capitalists, they had no choice but to make a profit by, for example, opening more stores than they may have thought prudent. The results, at times, were fortunate and I did not wish to have such constraints. I wanted to be able to manage my company with a long-term vision. Nowadays, however, one finds venture capital enterprises even in Japan that want to incubate companies with a long-term vision. The situation has improved immeasurably.

  12. Question (Dr. Gerhard Fasol): You have started a number of new ventures in the medical field as well as the social networks. Can you tell about your vision for the future of UBIC?

    Answer (Masahiro Morimoto): We would like to contribute to the creation of a better future for society through the application of information analysis. At the same time, we hope to introduce a new approach to behavior informatics, on the basis of our extensive experience in litigation support and the application of innovative technologies developed through our research.
    Currently, many businesses are providing solutions for big data analysis of human behavior. But the amount of big data is so huge, that it is difficult for people to conduct in-depth analyses. Generally, little more than average results are produced, without specific topic-related differentiation.
    Our AI technology, however, which has been developed by our legal technology specialists, closely emulates human ability and behavior. In addition, it replicates tacit knowledge: the wisdom, and intuition of experts. In other words, our technology can reproduce what is difficult to verbalize. As a result, we are able to analyze subtleties, sensitivities, and distinctive aspects of individuals, which can for example, form the basis of medical diagnosis and individual consumer behavior and preferences.
    Our vision is to provide AI-based solutions that enable each person to realize his or her individuality and potential in order to develop creativity at work and in other settings.

  13. Question (Dr. Gerhard Fasol): Can you tell us the reason you decided to become an entrepreneur and start UBIC? What is your advice to other entrepreneurs who wish to set up their own business in Japan, or globally?

    Answer (Masahiro Morimoto): Well, at first I had no intention of becoming an entrepreneur. But, I developed a strong sense that I had to do something for those Japanese companies that were incurring huge financial losses as a result of litigation abroad. At the time, there were not many forensic or e-discovery services in Japan that offered strong support. That was why, after having accumulated from scratch the know-how required to set up a company, I established my own enterprise. My mission today is to support companies worldwide with our AI, which can emulate experts’ behavior and apply their wisdom to that we can continue to come up with appropriate business solutions.
    My advice to entrepreneurs and people who want to set up their own company is to have a clear mission, and to commit to this with persistence and the support of a strong team.

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Toshiba accounting restatements in context

Toshiba accounting restatements in context

July 21, 2015: Update – report of the independent 3rd party committee chaired by former Chief Prosecutor of the Tokyo High Court.

Corrections amount to 2 1/2 years (31.5 months) of average annual net profits

Sales stagnation combined with almost zero net profit of Japan’s top 8 electronics companies creates increasing pressure to improve performance: top 8 electronics groups stagnate while Japan’s top-7 electronics parts makers thrive

Toshiba over the last few weeks published a number of announcements, and corrections to these announcements concerning accounting issues. Toshiba also engaged internal and independent external expert commissions to analyze possible accounting discrepancies, these committees have made preliminary announcements.

At a recent Press Conference, the CEO of the Japan Exchange Group (JXP) which includes the Tokyo Stock Exchange, Mr Atsushi Saito, said that “he feels very much ashamed for Toshiba”, and that “he cannot understand how Toshiba can be so lazy about their accounting”.

To understand Toshiba in the context of Japan’s electronics industry, read our report on Japan’s electronics industry sector:
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Toshiba in the context of Japan’s electronics industry sector: top-8 electronics groups stagnate while electronics parts makers thrive

Japan’s top-8 electronics giants – including Toshiba – have essentially stagnated for the last 17 years with negligible growth and negligible profits. Japan’s top 8 electronics groups combined have sales approximately as large as the economy of The Kingdom of the Netherlands. However, the big difference is, that in the 17 years since 1998, the economy of The Netherlands has approximately doubled, while Japan’s top 8 electronics companies have not grown their sales at all over these 17 years. Expressed in Japanese YEN, the combined sales of Japan’s top 8 electronics companies in FY1998 is about the same as in FY2014.

Japan’s electronics parts makers are a very different story: similar to The Netherlands, Japan’s top-7 electronic parts makers have grown to more than twice the size over the 17 years from FY1998 to FY2014. Some of the Japanese electronics parts makers have growth targets which should allow them to overtake Japan’s current incumbent electronics groups!

To understand Japan’s electronics sector, read our report.

The stagnation of sales growth combined with almost zero profits over 17 years of Japan’s top 8 electronics groups, of which Toshiba is one, certainly puts much pressure on Japan’s electronics groups to improve performance. This pressure might be the background of accounting issues.

Lets look at the actual Toshiba financial data in detail

The figure below shows Toshiba’s previously reported operating income/profits (blue curve), and the recently announced preliminary corrections (red curve). The combined amount of downward corrections is about YEN 50 billion (US$ 0.5 billion) in total.

Lets put this amount into context (financial data from our Report on Japan’s electronics industries):

  • annual sales: approx. YEN 6000 billion (US$ 60 billion)
  • annual operating income (average over last 17 years): YEN 148 billion (US$ 1.5 billion)
  • annual net income (average over last 17 years): YEN 19 billion (US$ 190 million)

Therefore the downward correction corresponds to:

  • approx. 0.8% of average annual sales
  • approx. 33% of average annual operating profits
  • approx. 2 1/2 years (31.5 months) of net profits

Toshiba – typical for Japan’s large electronics corporations – operates with razor-thin profit margins: Toshiba’s net profit margin averaged over the last 17 years is 0.25%.

Therefore, the downward correction corresponds to 31.5 months of average net income/profits.

Toshiba accounting corrections amount to approx. 33% of average annual operating income

Toshiba operating income: previously announced (blue) vs preliminary corrections (red)
Toshiba operating income: previously announced (blue) vs preliminary corrections (red)

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Japanese electronics parts makers grow, while Japan’s iconic electronics makers stagnate

Japanese electronics parts makers grow, while Japan’s iconic electronics makers stagnate

Japan’s iconic electronics groups combined are of similar size as the economy of The Netherlands

Parts makers’ sales may overtake iconic electronics groups in the near future – they have already in terms of profits

In the 25th edition of our analysis of Japan’s huge electronics industry sector, we compare the top 8 iconic electronics groups with top 7 electronics parts makers over the period FY1998 to FY2014, which ended March 31, 2015 for most Japanese companies. Except for Toshiba, all Japanese major electronics companies have now officially reported their FY2014 results.

Japan’s iconic 8 electronics groups (Hitachi, Toshiba, Panasonic, Fujitsu, Mitsubishi Electric, NEC, SONY and SHARP) combined are as large as the economy of The Netherlands – but while the economy of The Netherlands doubled in size between 1998 and 2015, the sales/revenues of Japan’s iconic 8 electronics groups combined showed almost zero growth (annual compound growth rate = 0.4%) and almost zero income (profits).

Japan’s top 7 electronics parts makers on the other hand – similar to the Netherlands – more than doubled their combined revenues (sales) over the 17 years from FY1998 to FY2014, and earned healthy and increasing profits.

While several of Japan’s iconic electronics groups are fighting for survival, Japan’s parts makers have very ambitious growth plans – some of them may well overtake the traditional electronics conglomerates in sales – they have already in terms of profits. And they aggressively acquire around the world.

Detailed data and analysis in our Report on Japan’s electronics sector (25th edition).
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Japan’s electronics parts makers combined more than doubled sales over the last 17 years

Japan's top 7 electronics parts makers grow at CAGR of 4.6%
Japan’s top 7 electronics parts makers grow at CAGR of 4.6%

Japan’s iconic top 8 electronics groups showed almost no growth over the last 17 years

Japan's top 8 iconic electronics groups stagnate - some fight for survival
Japan’s top 8 iconic electronics groups stagnate – some fight for survival

Japan’s electronics parts makers grow – the traditional electronics groups stagnate

Japan's electronics parts makers grow - Japan's iconic electronics groups stagnate
Japan’s electronics parts makers grow – Japan’s iconic electronics groups stagnate

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Japan Exchange Group CEO Atsushi Saito: proud of Corporate Governance achievements, but ashamed of Toshiba

Japan Exchange Group CEO Atsushi Saito: proud of Corporate Governance achievements, but ashamed of Toshiba

New Dimensions of Japanese Financial Market

Only with freedom and democracy, the values of open society and professionalism can the investment chain function effectively

The iconic leader of the Tokyo Stock Exchange since 2007, now Group CEO of the Japan Exchange Group gave a Press Conference at the Foreign Correspondents Club of Japan on June 12, 2015, a few days before his retirement, to give an overview of his achievements and to review the status of Japan’s financial markets today.

Atsushi Saito expresses his satisfaction and pride and surprise about the big improvements in corporate governance and the mind change happening in Japan now.

Atsushi Saito has worked as equity analyst in the USA, experienced the US pension fund debate, and when he was pushing for reform of corporate governance in Japan around 1990 was ignored or even criticized. He is surprised to see that these changes he has been keeping pushing for since 1990 are actually implemented now.

Atsushi Saito directly expressed his shame about the accounting problems recently revealed at Toshiba, and contracts Hitachi, which has independent outsiders, women and non-Japanese foreigners on the Board of Directors, with Toshiba which has not. Atsushi Saito directly said: “I am very puzzled why Toshiba is so lazy to check their accounting”.

Atsushi Saito – leading the Tokyo Stock Exchange since 2007

Leading the Tokyo Stock Exchange since 2007, Atsushi Saito aspired to create an attractive investment destination in Tokyo for investors from all over the world with the following achievements:

  • modernized the trading systems
  • developed a self regulatory body
  • merge with Osaka to create Japan exchange group

Reform corporate governance to improve capital efficiency and corporate value of Japanese companies

The most imperative challenge has been left untouched for far too long: reform of corporate governance in Japan to improve capital efficiency and corporate value of Japanese companies.

Recently we introduced the Corporate Governance Code and we see a shift of mindset in Japanese companies.

Structural impediments remain remain in Japan’s financial market

Structural impediments remain remain in Japan’s financial markets, indirect finance from Banks remain a significant force in corporate finance.

Japanese investment bankers continue to fall way behind European and US rivals.

The post financial crisis regime under Basel 3 puts breaks on excessive leverage.

When global economy returns to high growth, we are not able to rely solely on money centered banks – banks will not be able to provide enough capital satisfy demands in a growing world economy.

Foresee demands for international organizations WorldBank, ADB and new AIIB and private equity funds.

With FinTec, we expect unbundling across separate financial service lines

With fintec, combining financial services and technology, we expect increasing unbundling across separate service lines for banking services, between settlement, wire transfers, loans and other services.

We will see more financial services.

Over dependence on main banks, risk aversion, lack of sense of duty by corporate managers led to the death of Japanese equity as an asset class

In Japan, as a consequence of dependence on indirect finance by money centric main banks, deep involvement of the main banks in corporate management, Japanese companies grew increasingly risk averse shied away from dynamic investment, and ultimately damaged corporate value.

There was a demise of the sense of duty by corporate managers use equity capital efficiently, and as a consequence of these factors, we saw a global divestment from Japanese stocks, eventually leading to the death of Japanese equity as an asset class.

Pushing since 1990 for reform of corporate governance in Japan, Atsushi Saito was not only ignored but even criticized

Atsushi Saito working as an equity analyst in the USA, followed the US pension debate, and started to push for reform of corporate governance in Japan around 1990, he was not only ignored but criticized.

Japan’s recent miraculous turn on corporate governance took Atsushi Saito by complete surprise

Today Japan addresses corporate governance, there is a miraculous turn of mindsets and regulatory framework. We saw:

  • amendment of companies act
  • corporate gov code
  • stewardship code

That these changes could happen came as a complete surprise.

Atsushi Saito hopes that this momentum can be maintained, and fiduciary duties of pension fund managers towards beneficiaries will be strengthened to nurture greater professionalism among Japanese institutional investors, similar to The Employee Retirement Income Security Act of 1974, or ERISA act in the USA.

Only with freedom and democracy + values of open society + professionalism can the investment chain function effectively

Only with freedom and democracy, the values of open society and professionalism can investment chain function effectively. This pattern is what defines truly advanced economy

The recent transformation has brought Japan back into the focus of professional investors globally and a new dawn beckons for Japan.

All stakeholders must remain focused to follow through these early signs of change to ensure that Japan welcomes a brighter future.

Questions and answers

Q: Japan not joining the Asian Infrastructure Investment Bank (AIIB) will deprive Japan of opportunities?

A: The Japanese Government did not say that it will not join the AIIB, but today there is no clear set of rules for the AIIB, the governance structure is unclear. To use tax payers money our government needs to be prudent before they make a decision on investment. There are about 20 international banks and similar organizations, 19 of them have clear governance rules. All except AIIB have clear governance rules. In case of AIIB China will have about 30% holding. Probably our Government will wait before making a decision, and Atsushi Saito thinks this is reasonable.

Q: Will Tokyo Stock Exchange enter into international alliance?

A: Stock Exchange business is a very nationalistic business – only USA has multiple exchanges. All other states have one single Exchange totally under control, regulations, culture by single states. Theoretically Exchanges between different countries can merge, but none succeeded. We saw no case in the world were Exchanges from different countries merged successfully, all such cooperations failed.

Q: Plans of Toyota to have non-traded convertable shares?

Its up to their shareholders. Legally they did not violate any rule.

Japan does not have any priority on special stocks.

I see a discrepance in the USA: The US aggressively raises the voice for rights of shareholders, and corporate governance elsewhere. At the same time US companies are the largest issuer of special stocks for special owners, e.g. for Google or Facebook, more than 50-60% of voting power is dominated by the founders of these companies. –
I see a discrepancy, its an ironical discrepancy. I am talking to the leaders of US : US is very nosy about our corporate goverance, protection of shareholders, but how do they protect shareholders of Google or Facebook?

Q: What is your advice for Japanese economy to regain vitality and energy, for Japan to become No. 1 in the world?

A: I am very concerned about efficient capital use and corporate governance. When I was securities analyst in USA, I was always asked about financial data of Japanese corporations.

  • Fuji Film had huge cash on the balance sheet – their competitor, the yellow-color photo company was always diligent with share holders, paid dividends, did share buy-backs. Fuji spent much R&D on pharmaceuticals and diversification. The Yellow color photo company disappeared, and Fuji Film is very healthy. Accumulation of sleeping capital is useless. But efficient use of capital is crucial.
  • when GM went bankrupt it was discovered that they had great technology, like electrical car projects which had been stopped. GM had stopped these R&D projects, because shareholders had insisted to stop R&D spending, and pay hire dividends, and ultimately went bankrupt.
  • Toyota had 3 trillion yen cash. This was heavily criticized. Toyota was secretely developing electric cars – now LEXUS electric car is bestseller in USA.

We are concerned to respect shareholders, but shareholders’ short term wishes are not always best for the company.

Even BlackRock wants long-term enterprise development rather than short term cash benefits.

Q: Impact of weak YEN on Stock Exchange

A: Even with weak yen, our trade balance is negative. Yen rate is not pushing export from Japan. Japan is manufacturing outside of Japan. Trade account is negative, capital account is black, currency account is black. Overseas subsidiaries are sending dividends back to Japan at the yen rate of 120. Its smart return in the capital account. Our industry structure has changed, we are not exporting on the back of weak yen, so we are not criticized.

Q: plans after retirement

A: I decided: no job – I will take rest.

Q: Disclosure. Often financial data are exposed early in Nikkei or Japanese press prior to official disclosure.

A: I am often asked about this. I don’t know how the press gets their information, its a free market for the press. As long as they don’t do any insider trading or use this information privately, I don’t see anything wrong with early public disclosure. Its a competitive issue between journalists, we cannot critisize competition among journalists. Very sharp journalists pick up information, we are not the police we cannot stop them. Its a competitive world – even for journalists.

I live far outside from Tokyo, sometimes journalists wait at the door to my home in the suburbs. I think this is an invasion of my privacy, and I don’t tell them information at my home.

Q: Trust in the stock market, low Japanese retail investor participation.

A: Advanced states have 60-70% own domestic investors, not outside foreign investors.

Foreign professional investors have immediately responded to the logic of our corporate governance reforms. Especially US and UK pension managers have immediately responded to the improved efficiency of our markets. Investment professionals in London, New York, Scotland can evaluate the meaning of our regulatory changes.

Japanese professional or private investors could not understand the improvements we have done, they did not react.

Mutual funds however are at record hights and we have 8 million ELISA private pension investments in Japan now. People start to build their own pensions now, so retail investors are coming into the market.

We have a normal quiet market now here in Japan regarding sales of equities.

Q: Tokyo as a financial center?

A: If you ask the same question to London, they will say that with IT all transactions are global. There may be arbitrage on the prices. If you compare Shanghai and NY, the trading volume in Shanghai is higher than in NY, but Shanghai not a global financial center, because they are not liberalized in capital in and outflow, they are No. 1 only in volume.

The definition of Financial Center of the World has changed.

We want to be one of the better places in financial business globally. We want to offer convenient and friendly conditions for financial people to come to Tokyo, as one of the centers for financial business.

Tax plays a very important role to define financial centers. London or NY or Tokyo cannot follow a city state like Singapore. We cannot have the same tax system. Tokyo is far bigger than Singapore.

“Global financial center” is a vague subject for me.

Q: Do current prices accurately reflect corp performance. Foreign investors: speculative short-term gains? will foreign investors pull out when Bank of Japan money flush ends?

A: I don’t think the Japanese market is overheating at all. I think the short term speculators have already left Japan.

Long term investors have long asked for change in Japan, Japan did not listen, but now for the first time Japan is listening and changing, and I am feeling longterm investors are understanding this change. We have long term investors here now in Japan.

Q: is high-frequency trading a danger for Stock Exchange?

A: Flash Crash in US was due to the diversity of exchanges. There are 50-60 markets in US. Flash Crash artificially made, not becaue of speed of trading.

Our rules for pricing system here in Japan, we learnt this since the Edo era, we cannot have flash crash, we limit the price changes, we are cooling the trading. Our system of pricing is different than in the USA.

We have many high-frequeny traders from abroad, and they appreciate our system. US high frequency traders critized us up to 10 years ago, but today they appreciate our pricing system here in Japan, they want to learn our Stock pricing system. This has really been a big change for us.

Q: False accounting at Toshiba. Impact on trust in Japan’s stock market.

A: I feel very ashamed for Toshiba. Toshiba should be the mentor or leader of Japanese industry – not the opposite.

Hitachi is a huge contrast to Toshiba. Hitachi aggressively introduced outside board members, foreign and women board members. Hitachi is investigated by outside and foreign board members.

Toshiba is a total contrast to Hitachi.

I am very puzzled by that – why is Toshiba so lazy to check their accounting.

We hope that auditors and accounting houses are more professional and more serious. They told us that their subsidiaries have different accounting system. They must have intentionally checked that point.

My answer: my feeling is one of shame. We should definitely not repeat this type of thing.

Q: Why do Japanese company accumulate so much cash reserves.

A: One reason is that Japanese labor laws compel Japanese companies to have reserves to pay for restructuring. We introduced changes in corp governance, and many companies now use the cash for M&A to acquire foreign companies, or e.g. Fanuc has increased dividents.

I am optimistic for Japanese companies, because they are using cash more efficiently now.

Copyright (c) 2015 Eurotechnology Japan KK All Rights Reserved

Japan top grossing smartphone apps

Japan smartphone game business

5 top listed smartphone app companies have combined market cap of US$ 14 billion (excluding LINE)

LINE is currently a private company and LINE’s company value is generally estimated in the US$ 10-15 billion range, so if we include LINE, the combined market value of Japan’s top 5 smartphone game companies is on the order of US$ 24 – 29 billion.

Top grossing apps in Japan’s iPhone and Google Play/Android app stores on June 6, 2015

Japan’s smartphone app market is the world’s largest in terms of cash revenues according to AppAnnie. Lets analyze which apps are at the top-grossing in the world’s largest app market.

Japan game market report (398 pages, pdf-file):
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iPhone app store top grossing ranking (June 6, 2015)

  1. Monster Strike by MIXI
  2. Puzzle & Dragons by GungHo
  3. Final Fantasy Record Keeper by DeNA
  4. LINE by LINE Corporation
  5. Actual powerful pro baseball by KONAMI
  6. all 25 top-grossing iPhone apps on June 6, 2015

Google Play Android app store top grossing ranking (June 6, 2015)

  1. Monster Strike by Mixi
  2. Puzzle & Dragons by GungHo
  3. LINE Disney tsumu tsumu by LINE Corporation and Walt Disney Corporation
  4. White Cat Project by Colopl Inc.
  5. Sword and sorcery. Logres of Swords and Sorcery – original popular online RPG by Marvelous Inc.
  6. all 25 top-grossing Google-Play store Android apps on June 6, 2015

Market capitalization of the companies involved:

  • Mixi: YEN 443 billion (US$ 3.5 billion)
  • GungHo: YEN 580 billion (US$ 4.6 billion)
  • LINE: unlisted
  • Konami: YEN 324 billion (US$ 2.6 billion)
  • Colopl: YEN 312 billion (US$ 2.5 billion)
  • Marvelous: YEN 86.8 billion (US$ 0.7 billion)

Analyzing the market capitalization of these companies, it is obvious that a large part – or all – of the value is in the smartphone games.

As an example, Mixi’s core business was the mixi Social Network, which lost weight with the success of Facebook in Japan, until the breakthrough success of its Monster Strike game during FY2014.

How are foreign companies doing in Japan’s smartphone app market?

Disney achieved consistently high rankings in cooperation with LINE for the tsumu-tsumu game.

Next highest ranking foreign game is the Finland based, 73.2% SoftBank owned, Clash of Clans by Supercell on rank 12.

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Japan Google Play top grossing Android apps

Japan smartphone game business

25 Japan Google Play top grossing Android Apps of June 6, 2015 (All Categories)

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  1. No. 1 Monster strike (by Mixi)
  2. No. 2 Puzzle & Dragons by GungHo
  3. No. 3「LINE: ディズニーツムツム」LINE Disney tsumu tsumu (by LINE Corporation & Disney)
  4. No. 4「白猫プロジェクト」”White Cat project” by COLOPL Inc.
  5. No. 5 「剣と魔法のログレスいにしえの女神・人気の本格オンラインRPG」Sword and sorcery. Logres of Swords and Sorcery – original popular online RPG by Marvelous Inc.
  6. No. 6 「クイズRPG 魔法使いと黒猫のウィズ」”Quiz RPG magic using black cat whiz” by COLOPL Inc.
  7. No. 7 「グランブルーファンタジー】」Grandblue Fantasy by Cygames Inc. (Cygames is a joint-venture company between CyberAgent (74.04%) and DeNA (24.03%), originally founded in May 2011 as a subsidiary of CyberAgent Corporation)
  8. No. 8 LINE PokoPoko by LINE Corporation
  9. No. 9 LINE by LINE Corporation
  10. No. 10 FINAL FANTASY Record Keeper by DeNA
  11. No. 11「実況パワフルプロ野球」”Actual powerful pro base ball” by KONAMI
  12. No. 12 Clash of Clans by Supercell. Supercell is now valued at US$ 5.3 billion and 73.2% owned by SoftBank.
  13. No. 13「ファントム オブ キル」”Phantom of the Kill” by gumi Inc.
  14. No. 14 Love life! School Idol Festival by KLab Inc.
  15. No. 15 OnePiece Treasure Cruise (by Bandai Namco Entertainment Inc)
  16. No. 16 LINE POP2 by LINE Corporation
  17. No. 17「スクールガールズストライカーズ」”Schoolgirl strikers” by Square Enix Ltd.
  18. No. 18 Dragon poker by Asobism Co Ltd
  19. No. 19 Dragon Quest Monsters Superlight (by Square Enix)
  20. No. 20 「戦国炎舞 ‐KIZNA‐ 【人気の本格戦国RPG】」Sengoku Enbu – KIZNA – (popular true waring states RPG) by Sumzap Inc (株式会社サムザップ) (Sumzap Inc. is a 100% owned subsidiary of CyberAgent Corporation).
  21. No. 21 LINE Rangers by LINE Corporation
  22. No. 22 Summoners War by Com2uS Corporation (a South Korean game developer company)
  23. No. 23 「ブレイブフロンティア 【無料本格RPG-ブレフロ】」 Brave Frontier by Alim Co Ltd
  24. No. 24 「消滅都市」  Extinction capital – Everything in its right place. By Wright Flyer Studios Inc.
  25. No. 25 「ユニゾンリーグ◆-ユニフレと冒険-人気本格オンラインRPG」Unison League – (popular original RPG) by Ateam Inc.

Japan game market report

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Japan iOS App store 25 top grossing

Japan smartphone game business

25 Top Grossing iPhone Apps of June 6, 2015 (All Categories)

  1. No. 1 Monster strike (by Mixi)
  2. No. 2 Puzzle & Dragons by GungHo
  3. No. 3 FINAL FANTASY Record Keeper by DeNA
  4. No. 4 LINE by LINE Corporation
  5. No. 5「実況パワフルプロ野球」”Actual powerful pro base ball” by KONAMI
  6. No. 6「LINE: ディズニーツムツム」LINE Disney tsumu tsumu (by LINE Corporation & Disney)
  7. No. 7「チェインクロニクル・本格シナリオRPG/エヒクロ」”Chain chronicle original scenario RPG / Chaincro” by SEGA Corporation
  8. No. 8「白猫プロジェクト」”White Cat project” by COLOPL Inc.
  9. No. 9 Love life! School Idol Festival by KLab Inc.
  10. No. 10 MOBIUS FINAL FANTASY by Square Enix Inc.
  11. No. 11 「剣と魔法のログレスいにしえの女神・人気の本格オンラインRPG」Sword and sorcery. Logres of Swords and Sorcery – original popular online RPG by Marvelous Inc.
  12. No. 12 Clash of Clans by Supercell. Supercell is now valued at US$ 5.3 billion and 73.2% owned by SoftBank.
  13. No. 13 LINE PokoPoko by LINE Corporation
  14. No. 14 「クイズRPG 魔法使いと黒猫のウィズ」”Quiz RPG magic using black cat whiz” by COLOPL Inc.
  15. No. 15 「戦国炎舞 ‐KIZNA‐ 【人気の本格戦国RPG】」Sengoku Enbu – KIZNA – (popular true waring states RPG) by Sumzap Inc (株式会社サムザップ) (Sumzap Inc. is a 100% owned subsidiary of CyberAgent Corporation).
  16. No. 16 Dragon poker by Asobism Co Ltd
  17. No. 17 「グランブルーファンタジー】」Grandblue Fantasy by Cygames Inc. (Cygames is a joint-venture company between CyberAgent (74.04%) and DeNA (24.03%), originally founded in May 2011 as a subsidiary of CyberAgent Corporation)
  18. No. 18 Dragon Quest Monsters Superlight (by Square Enix)
  19. No. 19 OnePiece Treasure Cruise (by Bandai Namco Entertainment Inc)
  20. No. 20 Game of War – Fire Age by Machine Zone Inc. (a Palo Alto based game venture company)
  21. No. 21 Summoners War by Com2uS Corporation (a South Korean game developer company)
  22. No. 22 Tsuri Suta (Tsuri = Angling) (by GREE)
  23. No. 23 LINE Manga – free popular manga, daily renewed content by LINE Corporation
  24. No. 24 Hunter x Hunter Battle Allstars (by NamcoBandai Games Inc)
  25. No. 25 Puyo puyo!! Quest (by Sega Corporation)

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Smartphone games disrupt Japanese video game industry

Smartphone games disrupt Japanese game industry: 24 smartphone game companies achieve double the income of all traditional video game companies combined

24 new listed smartphone game companies achieve net income twice as high as all top 8 traditional video game companies combined

Its not just Nintendo being disrupted, its the whole Japanese video games industry

In the most recent version of our report on Japan’s game industry, we added 24 publicly listed new smartphone game companies (listed on the Mothers market or the second or first sections of the Tokyo Stock Exchange), and we also added not-yet-publicly-traded LINE, and we will add more in future editions.

Japan game market report (398 pages, pdf-file):
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There has been much media focus on Nintendo and how it is affected by the rise of smartphone freemium games, and how it will react. But our analysis shows that its not just Nintendo thats affected, but the whole traditional Japanese video game industry.

Smartphone games disrupt:

During financial year just ended, 24 publicly listed Japan’s smartphone game companies earned twice as much income as all top 8 traditional video game companies combined.

Combined net income in FY2014 (which for most companies ended on March 31, 2015) for 24 publicly listed Japanese new smartphone game companies is about YEN 200 billion (about US$ 2 billion), compared to a combined net income of about YEN 100 billion (about US$ 1 billion) for all top 8 traditional Japanese video game companies:

net income of Japan's top 8 traditional video game companies is about US$ 1 billion in FY2014
net income of Japan’s top 8 traditional video game companies is about US$ 1 billion in FY2014 (source: official company financial reports)
net income of 24 listed Japanese new smartphone game companies combined in FY2014 is about US$ 2 billion
net income of 24 listed Japanese new smartphone game companies combined in FY2014 is about US$ 2 billion (source: official company financial reports)

Japanese smartphone games have global impact and capture global value

Japanese smartphone game companies are in leading positions on global scale (Source: AppAnnie):

  • The globally No. 1 ranked top grossing company for iOS and Google-Play app stores combined is a Japanese company: LINE
  • 2 out of the top-10 top-grossing smartphone game companies globally (iOS plus Google-Play app stores combined) are Japanese companies
  • 5 out of the top-10 top-grossing apps globally (iOS plus Google-Play app stores combined) are Japanese apps

Learn more about Japan’s games industries

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